Government Purchasing and Contract Vehicles: Why Is It Important to Understand Both

This post is the first in a series on understanding government contracting and maximizing opportunities to participate in government contracts.

Facing the consequences of the financial crisis and a polarized political debate about government spending, government contracting markets have been pressured to spend less and be more productive. As a result, contracting practices are evolving and competition is getting tougher for contractors.

Federal government spending has declined annually since a high of $541 billion in FY2008, to a total of $460 billion in FY2013. In 2012, sequestration, a major policy initiative, made mandatory for all agencies to cut $1.2 trillion over 10 years across all federal agencies. Budget reductions and uncertainties have caused postponements, cancellations or changes in contract requirements and plans across agencies and programs.

Total federal spending on contracts (click image to enlarge)

Overall solicitation values and the average solicitation value in 2013 (302.4 billion and $47.8 million, respectively) continued to decline from the most recent high watermark year of 2011 ($376.2 billion and $78.4 million, respectively). At the same time, federal procurement programs are expected to continue to shift toward programs that are smaller in scope and dollar value, making it easier for agencies to gain approval to move forward despite restricted budgets. Even though some industry analysts predict that FY2014 will result in a greater number of “high dollar” (i.e. larger in scope in dollar value) procurement opportunities, the competition for fewer dollars, overall, will increase.

There are many types of government contracts (or “contract vehicles”) under which a company may pursue and close a sale. A contract generally can be categorized by how the government pays for what it purchases, how the government orders what it purchases, and who may participate in the procurement. Understanding how each provides access to the government market is key to forming a strategy and selecting a path forward. It is perhaps more important now than ever for new entrants to the US federal contracting market to identify multiple points of entry to the market and in turn to identify for each entry point the vehicle(s) that will offer a strategic entry advantage.

Trends in Types of Contracts Used

Some overall trends in the way the Government pays for goods and services it buys are notable. Fixed price contracts, which place the maximum amount of risk and responsibility for all cost and profit upon the contractor, remain favored by the government and accounted for 50% of the contracts awarded in 2013.  Fixed price award with economic adjustment has become more common, accounting for 4.77% of all awards during 2013.

Cost plus fixed fee accounted for 15.6% of all contracts in FY2013. It has been the second-most widely used contract vehicle each fiscal year since FY2008, representing 8.9% of all prime contract dollars spent by the government. Cost plus award fee is also commonly used, accounting for 9.4% in FY2013.

Fed Contract Awards by Type of Contract Used

(click image to enlarge)

From 2009 through 2012, agency-specific indefinite delivery, indefinite quantity (IDIQ) contract vehicles accounted for an increasingly large portion of federal government spending, taking over some of the market share previously enjoyed by government-wide acquisition contracts (GWAC) and multi-agency contracts (MAC). Many of those agency-specific vehicles are slated for re-competition in 2014. One example of an agency that uses these agency-specific vehicles would be the Army Computer Hardware Enterprise Software and Solutions (CHESS). CHESS is the Army point of contact for GWACs and IDIQs.

At the same time, through the use of GWACs and MACs–rather than agency-specific, single-award IDIQs–agencies can, in theory, increase efficiency and reduce cost, because they only have to issue orders to the company or companies that have been awarded those contracts. GWACs will continue to be used especially to handle multi-agency IT procurements. There are only three agencies designated by the Office of Management Budget to run GWACs—the General Services Administration , the National Aeronautics and Space Administration, and the National Institutes of Health. There are other MACs for other industries.

Government spending trends also reflect the pressure to open federal contract spending up to more competition. As a result, MACs where multiple companies, not one, are selected to perform a contract are also widely used. Those companies will then have to compete to be selected for specific task or delivery orders for one or more agencies. More than 25% of all government contracts in 2012 were MACs and the trend is expected to continue.

GWACs and MACs tend to have a life cycle of 3 to 5 years. Therefore, companies that want to sell to the government goods or services covered by those contracts have to partner or become a subcontractor to GWAC and MAC prime contractors.

Identifying Opportunities to Participate in Government Contracts

In this highly competitive environment, it will become increasingly important to identify multiple ways of enlarging a company’s opportunities to participate in as part of one or more teams that will secure the overall work. Teaming and subcontracting are excellent methods for accessing the U.S. government market and are less costly channels to access end-users.

A company should consider the extent to which its product or services can be marketed via

  • New contract vehicles, either by becoming a prime contractor, by becoming a subcontractor, or by partnering with another company.
  • Firm, fixed-price contracts that offer supply or subcontracting opportunities.
  • Cost-reimbursement and cost-plus-fee contracts that offer supply or subcontracting opportunities.
  • GSA schedules or any other type of GWA contracts.
  • Any multiple award/multiple agency contract held by a company or one of its strategic allies.
  • Any contract held by a company’s strategic ally under which subcontracting is an option.
  • Any program giving preferences  to a defined class of providers, including
          • small businesses.
          • small disadvantaged businesses.
          • women-owned businesses.
          • veteran-owned and service-disabled veteran owned small businesses.
          • businesses located within a geographic area designated as a Historically Underutilized Business Zone (HUBZone).

By considering all the above mentioned options, a company can expand its opportunities and minimize the risks that flow from an “all or nothing” bid approach.

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